The first time MF Global’s chief executive Bernard Dan looked at the firm in detail was last year when he was a consultant for a private equity shop eyeing a deal with the broker.

The deal went to a rival but a few months later Dan was putting the knowledge he had gained to good use, writing to the firm about the opportunities he saw there. The company was impressed and subsequently hired Dan as chief operating officer.

Six months ago, he was named chief executive, following the resignation of Kevin Davis.
Dan’s letter came at a crucial time. He said: “I had made due diligence on the firm and I saw the strong operations platform, its historical performance and global distribution. So, relative to what was going on in the crisis, I knew the model would be successful in the future.”

In addition to the general market turmoil, the broker was dealing with internal crises. The firm was badly hit in February 2008 by a rogue trading scandal, when a Memphis-based broker lost $141m (€107m) in allegedly unauthorised trades, wiping out much of the company’s annual earnings.
The fraud shook MF Global – sending its share price plunging and wiping out more than 90% of its market value – and led to Davis’ resignation.

The broker’s share price almost halved in Dan’s first month to a low of $1.73 but has since increased to $5.94. It is still a long way off its peak of $31.53, a year to the day before Dan’s appointment.

One of the biggest challenges for Dan was to reposition the company and enable it to be more efficient, through more stringent risk management and a renewed organisational structure.

Six months after his appointment as chief executive, Dan acknowledges that rebuilding the firm’s image was testing.

He said it has done a lot of work to figure out how to create greater transparency and that risk management will be an area of continuous improvement.

He said: “It’s a great opportunity for us because banks around the world are suffering from failed risk management systems that led to the crisis.”

He believes MF Global can take advantage of the situation as it is one of the only major non-bank intermediaries and it doesn’t have balance sheet risk or uncertainty with regard to pricing.

Dan, who believes the independent model will be the choice of customers in the future, said: “We don’t have any of those attributes and are not influenced by the impact of the bail-out money.”

For the final three months of 2008, the firm’s net income was up 25% to $39m from $31.2m from the same period in 2007, while revenues were up 0.8% to $422m. MF Global will report its fourth quarter earnings on May 21 and analysts are mostly positive.

Richard Repetto, an analyst at Sandler O’Neill, said: “MF has done an excellent job of restructuring its balance sheet and freeing up capital as well as what appears to be more disciplined risk management procedures and processes.”

He added that while the operating environment continued to be challenging, management had gained credibility by explaining the complexities of the business and reducing risk.

Keefe, Bruyette & Woods analyst Niamh Alexander agreed, saying the company’s management has made significant progress towards improving liquidity at the firm. She said: “We also feel MF has enough balance sheet flexibility regarding its financial covenants. In addition, we think MF is well positioned to take market share as the migration of over-the-counter trading to central clearing progresses.”

Dan said the Government’s efforts and increased regulation regarding over-the-counter products played to MF’s strengths and created greater opportunity for the company.

The crisis has not been all bad for MF Global and Dan thinks it helped the firm find a better position. He said consolidation in the industry would continue as small and medium firms lacking diversity would have a difficult time surviving.

He said he expected talented staff to leave Troubled Asset Relief Program banks and an overall change in the models as banks that have received government aid became constrained. He said: “I don’t know what is going to happen with Tarp, but we are seeing the benefits of some uncertainty that surrounds banks. We have taken advantage of that and will continue – whether taking teams or acquiring smaller firms. We will be opportunistic.”

The firm, however, is also looking at new drivers of income, particularly through primary dealer status which could expand its fixed-income business. It is working with the US Federal Reserve on becoming a dealer to participate in the auction of treasury debt – which could be a big opportunity given the high levels of debt issuance shared by fewer dealers.

Dan, who was previously president and chief executive of the Chicago Board of Trade, said his experience there helped him at MF as he learnt the products, its largest users, the strengths and weaknesses of the leading firms and an understanding of the regulatory issues.

Last week, MF said it would pay back its $240m unsecured term loan facility on or before this Wednesday.

JP Morgan analyst Kenneth Worthington said in a report that he viewed this as a positive step since it tackled leverage and covenant issue concerns.

However, he said that he expected both MF employees and customers to be particularly vigilant with respect to any risk management or operating issues.

He said: “We see MF employees and customers having no tolerance for additional operating mistakes. If operating problems should occur, we’d expect material customer and employee defections which could drive down future operating earnings.”

Dan remains optimistic, citing the fact his firm “pays back its debt with its own money”.

He said: “We are not reliant on the government bail-out to keep our balance sheet alive – it is key. Every sort of situation creates an opportunity and we demonstrated our ability to position ourselves with this – and take advantage.”